Fixed Rate – Short-Term vs Long-Term

With interest rates on the rise, securing your new remortgage deal, as soon as possible, can save you a significant amount on your monthly payments. Whether you’re considering a short-term fixed rate, a long-term fixed rate or any type of variable rate mortgage, we always advise getting in touch no less than six months before your current deal ends. Mortgage offers issued at this stage will generally last until your current product ends, so it makes sense to secure a new product at this stage. For first time buyers getting onto the property ladder, finding the right home is the priority. However, the sooner you can do this and then start your mortgage application, the lower your mortgage payments are likely to be.

In this week’s blog, we’re going to discuss the effect of the current economic climate on mortgage rates and how that may determine which type of mortgage is appropriate for you. The aim is not to sway you one way or another as there is no right answer. As always, but especially in current circumstances, the right mortgage depends on your personal circumstances and your appetite for risk.

On Thursday, the Bank of England announced yet another interest rate rise, increasing the base rate from 1.25% up to 1.75%. This is the sixth consecutive rise since December last year and represents the largest base rate rise in 27 years. Why are the Bank of England doing this? Well the Bank of England are an independent body charged with keeping inflation below the government target of 2%. Inflation is currently way ahead of this with the consumer price index (CPI) at 9.4% as of June 2022. This is predicted to rise throughout the remainder of the year. Raising interest rates is an attempt to reduce inflation with the idea being increased interest rates will disincentivise consumer spending, helping inflation fall.

In the current economic climate, the effectiveness of this strategy has been questioned. Raising interest rates is effective at reducing inflation when the driver of inflation is excess demand. In other words, if inflation is caused by increased consumer spending, raising interest rates does indeed help to discourage consumer spending and subsequently cause inflation to fall. However, the predominant driver of inflation is not currently excess demand. We’re in a supply crisis – inflation is being driven by supply issues and not excessive consumer spending. When there is short supply, prices are increased in an attempt to reduce demand. Inflation was always going to rise following the money which entered the system to support people during the pandemic. This, combined with the invasion of Ukraine and the supply chain it has created, has caused the rampant inflation we are seeing. Dealing with inflation before the conflict has ended will be incredibly difficult. Dealing with it by raising interest rates is a far cry from addressing the actual problem.

So what relevance does the above have on the question of short-term fixed vs long-term fixed? Well, interest rates may not continue to be increased when doing so is having little effect on increasing inflation. If they are not increasing, will they maintain or could they decrease? It is now widely accepted the UK is heading for a recession – a period of economic decline defined by consecutive quarters of a fall in GDP. Economic decline is not something any country wants. A common response to this is to reduce interest rates in an attempt to incentivise consumer spending, getting money back into the economy to stimulate economic growth. Just as increasing interest rates increases the cost of mortgages, reducing interest rates reduces the cost of mortgages

A short-term fixed rate may allow you to ride out the current period of higher interest rates and then remortgage if rates do fall. However, rates may not fall, or they may simply maintain. A long-term fixed rate provides security in your monthly payments. It allows you to be confident of what you’re paying for the duration of the fixed rate, without a risk of being stung by even higher payments if you went for a short-term fixed rate. However, if rates do fall, the risk is you could be tied into a mortgage that’s more expensive than necessary. In simple terms, a short-term fixed rate risks having to pay more when you remortgage; a long-term fixed rate risks losing out on the chance to pay less.

For most homeowners, the primary concern is how the current rising interest rates will affect their monthly payments, whether that be now or when they come to remortgage. Currently, the reality is people’s mortgage payments are going up. If you’re concerned or you’re simply wanting to discuss mortgage rates, debating whether to go for a short-term or long-term fixed rate or you’ve got any other mortgage query, we’re here to help with free, professional advice.